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Minority Shareholders: Wrongful Termination & Tortious Interference with Business Relations

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Throughout this series, we will detail some of the common methods that majority shareholders use to destroy a minority shareholder's value in the company and what rights a minority shareholder has when this happens. In this post, we address wrongful termination and a majority shareholder's tortious interference with a minority shareholder's business relations.

Wrongful Termination is a Common Method

The most common method the majority shareholders utilize to reduce the minority shareholder's interest in the company is to terminate the minority shareholder as an employee. Majority shareholders try to remove a minority shareholder in an effort to take a company for themselves by unilaterally "firing" the minority shareholder from the company. Barring entry to the place of business, changing the locks, and preventing minority shareholders from retrieving their personal belongings are common methods employed by majority shareholders. Any employee without an employment contract, no matter how much value he or she owns in the company, is not guaranteed employment but is rather an at-will employee at the command of the board.

It is Difficult to Challenge a Board's Decision to Terminate

As an at-will employee, the employee normally cannot challenge a decision by the board to terminate his or her employment.[1] Shareholder employees of closely held corporations are especially at risk from wrongful termination because in a closely held corporation the value of owning the company is in the running and management of the company just as much as the actual ownership. Without an employment interest in the company, a minority shareholder has no say in the way the company is managed, no compensation for his or her services, and is not entitled to other employment benefits. This severely reduces the value of any minority ownership of shares. However, there are some safeguards in place to prevent improper termination.

Safeguards Against Improper Termination

In the case of a shareholder who is also an officer of the company, there are usually several requirements in place for terminating the employment of an officer in the company bylaws, even if the employment of that officer is at-will. Failure to abide by these bylaw requirements will create a cause of action for a wrongful termination claim. Common requirements usually include a majority vote from the board of directors and written notice of a board of directors meetings. Additionally, notice of meetings usually has its own time and notice requirements, including directions for proper mailing, certain amount of days' notice before the meeting, and stating the purpose of the meeting (employee termination) in the notice. Georgia law requires that these bylaw rules be followed for proper officer or director termination.[2] Failure to follow these rules can create a claim for a terminated shareholder to recover his or her entire salary from the date of the wrongful termination.

Tortious Interference Claims

Wrongful termination may also give rise to a claim for tortious interference with another's business relations. In terms of a closely held corporation, the law in Georgia allows for tortious interference to be found when an employee minority shareholder is fired by a majority shareholder who does not have an absolute right to do so.[3] This is a result of the fact that Georgia courts have found employment, even if at-will, to be a property right. Thus, any individual that interferes with this right may be sued for tortious interference.[4] Depending on the action taken, any unilateral termination of the minority shareholder's employment by the majority shareholder without following the correct procedures of the corporation may result in the majority shareholder (but not the corporation itself) being personally liable for damages.[5] This can happen when the employee is an at-will employee with no employment contract, or even as an employee under contract with the company.[6]

What You Need for a Successful Claim

In order for a minority shareholder to bring a successful claim against a majority shareholder for tortious interference, he or she must prove that (1) there was improper conduct by the majority shareholder without privilege, (2) performed purposefully, (3) that induced the company not to enter into or continue a business relationship, and (4) the minority shareholder suffered some financial injury.[7]

Many majority shareholders in small companies both will not take the time to follow proper corporate procedures or forget to do so and will attempt to fire minority shareholders outright, so these requirements are sometimes easily met. Also, be on the watch for slanderous and libelous claims by the majority shareholder to business partners or other shareholders. Be aware of your rights to a claim of tortious interference against the majority shareholder in case this situation occurs. Frequently knowing your rights as a minority shareholder is half the battle. Keep informed of the privileges of an employee and involved with the inner workings of your company to avoid problems like the ones above. Wrongful termination is just the first step in a minority shareholder squeeze-out that sets the stage for withholding of dividends and tax burdens, the subject of the next post in this series.

Related Reading

[1] F. Hodge O'Neal & Robert B. Thompson, Oppression of Minority Shareholders and LLC Members, § 3:6 (rev. 2nd ed. 2004).

[2] O.C.G.A § 14-2-808.

[3] Troy v. Interfinancial Inc., 171 Ga. App. 763, 320 S.E.2d 872 (1984).

[4] "The fact that employment is at will and that the employer is free from liability for discharging an employee does not carry with it immunity to a third person who, without justification, causes the discharge of the employee. Thus, the rule has been stated that where a third person induces an employer to discharge an employee, under a contract terminable at will, but under which the employment would continue indefinitely, in accordance with the desire of the employer, except for such interference, and where the only motive actuating the third person is a desire to injure the employee a cause of action arises in favor of the employee against such third person." Ott v. Gandy, 66 Ga. App. 684, 19 S.E.2d 180, 182 (1942).

[5] See Georgia Power Co. v. Busbin, 242 Ga. 612, 614, 250 S.E.2d 442, 444 (1978); Am. Standard, Inc. v. Jessee, 150 Ga. App. 663, 664, 258 S.E.2d 240 (1979).

[6] Campbell v. Carroll, 121 Ga. App. 497, 498-99, 174 S.E.2d 375, 377-78 (1970).

[7] Hayes v. Irwin, 541 F. Supp. 397 (N.D. Ga. 1982).

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